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Zero-interest car loans

What 0% APR means on a car loan and what to watch out for when sealing the deal.

When shopping for a new car, you’ll come across advertisements for car loans with extremely low interest rates – sometimes even 0%. Before signing the dotted line and driving off the lot, there are some things you should know about taking out a zero-interest car loan in Canada.

What does 0% APR mean on a car loan?

A 0% APR car loan allows you to borrow money to buy a vehicle without having to pay interest and financing fees, which combined is known as the annual percentage rate (APR). This type of financing is mostly offered by dealerships as a way to sell more cars. Also, it is usually reserved for customers who have excellent credit (usually above 700). Banks or other lending institutions do not typically offer 0% interest car loans because these institutions have nothing to gain by offering them to you. With a dealership, at least you’re driving one of its cars off of the lot and moving inventory.

0% car financing sounds too good to be true. What’s the catch?

At first glance, 0% car financing is exactly as it appears: You purchase the car at the agreed-on price, and then make monthly payments on the principal of the car with no interest for a set number of months. However, keep these points in mind:

  • 0% interest may only be offered for part of the loan term.
  • To be approved, you’ll need spectacular credit (above 700).
  • Negotiating the car price will be difficult.
  • 0% interest car financing is only available to certain models.
  • You may not get as much money for your trade-in vehicle.
  • The loan structure will likely be set in stone.

Pros and cons of zero-interest car loans

Pros

  • 0% interest. Paying no interest on your car loan can save you hundreds or thousands of dollars in the long run (depending on your loan amount).
  • One-stop shop for financing. Dealerships offer 0% interest car loans so you can get financing and drive off the lot in your new vehicle with a single transaction.
  • Faster repayment. You’ll usually be able to pay 0% interest car loans off faster than you would with a traditional car loan (because terms are often shorter and there’s no interest).
  • Lets you upgrade your car choice. You may be able to afford a more expensive vehicle or luxury upgrades such as a sunroof or alloy wheels with a 0% car loan.

Cons

  • Only available from dealerships. 0% car loans are typically only offered by dealerships, which means you can’t get them from the bank or another lender.
  • More limitations. You may only be able to get financing for certain kinds of vehicles with 0% car loans, such as those that the dealership is trying to move out of its inventory.
  • More difficult to qualify. You can only qualify for a 0% interest car loan if you have good to excellent credit and a high income.
  • Higher monthly payments. 0% interest car loans often come with shorter terms to reduce the risk that you’ll default (which means higher monthly payments).
  • Risk that you’ll pay more. You could end up paying a higher price for your vehicle to make up for the lower interest rate (so your dealer still cuts a higher profit).
  • May be a limited offer. You may only get 0% financing for a portion of your loan amount or as an introductory offer for a limited amount of time.

How to get 0% car financing in Canada

To get a 0% car loan in Canada, you’ll need to do your homework to make sure you get the best deal. Follow these steps to get started:

  1. Check your credit score. Your first step in qualifying for a 0% car loan is to make sure your credit score is in excellent shape. You can do this by requesting a copy of your score from a major credit bureau such as Equifax or TransUnion.
  2. Shop around. Decide which vehicle you want to buy in advance and then shop around with a number of dealerships to compare prices. This makes sure you find a dealership that’s offering a reasonable price for the vehicle you’re interested in.
  3. Call the dealership. Call the dealership you choose to find out if they offer 0% car financing. If not, you can make your way down the list of dealerships you’ve compared until you find one that offers 0% car financing.
  4. Gather your documentation. When it’s time to visit the dealership, you’ll want to bring along information about your credit score and monthly income. If your credit score is low, you likely won’t qualify for 0% financing and may need to explore other options.
  5. Negotiate the deal. Work with your dealer to get the best deal possible on your loan. And keep in mind that there are always other options if your dealer won’t budge on certain conditions.

Red flags to watch out for

There are a couple of red flags you’ll want to consider when shopping around for a 0% interest car loan:

  • False promises. You should steer clear of lenders that offer 0% interest financing without checking your credit score or financial details.
  • Higher vehicle prices. Avoid lenders that offer 0% interest car loans but have much higher vehicle prices than other dealerships in your local area.
  • Introductory offers. Keep an eye out for 0% interest car loans that offer introductory 0% financing but then start charging interest mid-way through your term.
  • Bad customer reviews. Double-check online reviews for the lender you want to go with before you sign onto a loan contract to make sure there are no major issues.

    Alternatives to 0% car financing in Canada

    There are a number of alternatives to zero-interest car loans that you might want to consider to get financing for your new vehicle:

    • Low interest car loans. You’ll usually need a credit score of at least 660 to qualify (and your score will go down if you don’t make your payments).
    • Guarantor loans. Guarantor loans may be a good way to get a car loan if you have a poor credit score. This involves asking a friend or family member with good credit to cosign with you so you can get lower interest rates.
    • Online car loans. Online car loans let you compare interest rates from a number of different lenders all across Canada to find the best deal.

    Compare online car loans in Canada

    Name Product Min. Loan Amount Interest Rate Loan Term Min. Credit Score Requirements Table description
    Loans Canada Car Loans
    $500
    0% - 29.99%
    3 - 96 months
    300
    Min. income of $1,800 /month, 3+ months employed
    Get access to financing from multiple lenders across Canada through a single application with Loans Canada. Bad credit, CERB and EI borrowers are considered.
    AutoLoanProviders
    $7,500
    3.99% - 29.99%
    12 - 96 months
    300
    Min. income of $1,800 /month, 1+ months employed
    Available in Ontario only.
    Browse thousands of available vehicles and apply online from the comfort of your own home. Receive confirmation of your financing options and get your new vehicle delivered to your door anywhere in Ontario free of charge. All credit scores considered.
    CarsFast Car Loans
    $500
    4.90% - 29.90%
    12 - 96 months
    300
    Min. income of $1,800 /month, 3+ months employed
    Browse thousands of vehicles from dealers across Canada and get matched with financing that meets your needs. Apply online to purchase a new or used vehicle and get the vehicle delivered to your door.
    Coast Capital Car Loan
    $10,000
    Varies
    18 - 84 months
    650
    Able to service debt payment of $300/month
    Finance or lease both new and used vehicles with competitive rates and flexible terms from one of Canada's largest credit unions. No credit union membership required for this product.
    Splash Auto Finance
    $10,000
    9.9% - 29.9%
    24 - 84 months
    N/A
    Min. income of $2,200 /month, 3+ months employed
    Splash Auto Finance provides auto loans to borrowers with fair credit, bad credit, no credit or bankruptcy. Get financing for a new or used car.
    LoanConnect Car Loans
    $500
    9.90% - 46.96%
    3 - 120 months
    550
    No min. income requirement
    Get access to 25+ lenders through LoanConnect's brokerage. Receive pre-approval in as fast as 60 seconds and get your funds in as little as 24 hours.
    Canada Auto Finance
    $500
    4.90% - 29.95%
    3 - 96 months
    300
    Min. income of $1,500 /month, 3+ months employed
    Canada Auto Finance is a broker that connects borrowers with partnered local lenders. Financing for a new or used car is available for borrowers with bad credit, no credit, CERB, EI or bankruptcy.
    Carloans411 Car Loans
    $500
    1.90% - 19.99%
    Up to 72 months
    300
    Min. income of $1,600 /month, 3+ months employed
    Get connected with suitable lenders through CarLoans411. Finance your next car, van or truck with loans available in amounts from $500 to $50,000. Check eligibility for this loan through LoanConnect.
    Fairstone Secured Personal Loan
    $5,000
    19.99% - 23.99%
    36 - 120 months
    560
    Established credit history and own your home
    Fairstone offers secured personal loans up to $50,000.
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    Compare up to 4 providers

    How to get a good deal without a 0% interest car loan

    There are a number of things you can do to get a better deal on your next vehicle even if you don’t qualify for a zero-interest car loan. These include the following:

    • Get pre-approved. It makes sense to get pre-approved for a car loan to find out how much you have to spend before you start shopping. This will give you a good bargaining chip to drive the price of your vehicle down when you get to the dealership.
    • Compare prices. Shop around with multiple lenders to get the best rates on your loan. Once you know how much you have to spend, shop around with multiple dealers to find the best price on offer for the vehicle you want.
    • Shop for a used vehicle. Check out online offers for used vehicles or ask to see the inventory of used cars with your dealer. Just be aware that it can be more difficult to get financing if the vehicle is older or has high mileage. Learn more about buying a used car.
    • Look for sales or special offers. Wait for sales such as employee-pricing events or cash-rebate offers to save the most money on your car. This will let you drive off the lot with the best deal possible.
    • Improve your credit score. Work on improving your credit to make sure you can qualify for the lowest interest rates available. Start by finding out what credit score you need to get approved for a car loan.

    Can I get a zero-interest car loan if I have bad credit?

    You usually won’t be able to get a 0% car loan if you have bad credit. This is because your lender will have to take a big financial risk by offering you a 0% car loan. It will want to make absolutely sure that you pay your loan back in a short amount of time, with zero chance that you’ll default on your payments.

    What your bad credit tells your dealer is that you have a history of missing loan payments or defaulting on your financial obligations. The best way to get around this is to improve your credit score so that lenders see you as a reliable customer. Until then, you may end up paying higher interest rates to make up for the risk lenders have to take in giving you money.

    Bottom line

    Getting a 0% car loan can save you money on interest rates and let you pay your car loan off faster. The main downside of these loans is that they come with strict eligibility requirements and are usually only offered by car dealerships. Find out more about how 0% car loans work, and find out how you can qualify for this type of financing.

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